Lloyds Banking Group boss Antonio Horta-Osorio will forfeit 350,000 pounds ($536,000) in bonuses after the bank was fined 117 million pounds for failings in the way it handled complaints about mis-sold loan insurance.
Britain's financial regulator on Friday handed Lloyds the largest penalty it has yet imposed in relation to the country's most expensive consumer scandal.
Responding to the fine, Lloyds said it would cut bonuses paid to staff by 30 million pounds in 2015, while previous awards to executives worth 2.65 million pounds will be forfeited.
Horta-Osorio, who was handed a pay package for 2014 worth 11.5 million pounds, will lose out on 350,000 pounds as part of that process, people familiar with the matter said.
The Financial Conduct Authority (FCA) said Lloyds, which is 19-percent owned by the government, unfairly rejected a significant number of claims for compensation between March 2012 and May 2013.
The regulator's findings are a blow to Horta-Osorio, who has strived to repair the bank's reputation since its bailout during the 2007-9 financial crisis at a cost of 20 billion pounds to taxpayers.
The bank apologized to affected customers.
"Whilst our intentions were right, we made mistakes in our handling of some PPI (payment protection insurance) complaints. I am very sorry for this," Horta-Osorio said.
Lloyds has already set aside 12 billion pounds to compensate customers for the mis-selling, more than any other bank. It said the cost of reviewing the cases would not change that provision.
The industry as whole has set aside 26 billion pounds to deal with the matter and the bill is expected to rise.
PPI policies were meant to protect borrowers in the event of sickness or unemployment but were often sold to customers who did not require them, or who would have been unable to claim.
The FCA found Lloyds dismissed customers' personal accounts of what had happened during the PPI sale, or did not fully investigate customers' complaints in some cases.
In some instances, Lloyds did not contact customers to enable them to give their account of the sale.
The mis-selling is one of a number of scandals involving British banks in the past five years that have provoked a political and public backlash against an industry blamed by many for the financial crisis.
"If trust in financial services is going to be restored following the widespread mis-selling of PPI, then customers need to be confident that their complaints will be treated fairly," said Georgina Philippou, the FCA's acting director of enforcement and market oversight.
Lloyds shares were down 0.1 percent at 0800 GMT.
